Cenvat credit reversal not required for unavoidable by-products when exempt goods arise incidentally in dutiable manufacture.

Rule 6(3)(b) of the Cenvat Credit Rules, 2002 was held inapplicable where exempt goods arose only as unavoidable by-products in the manufacture of the intended dutiable product. The tribunal noted that liquid glucose was the principal product, while gluten and spent carbon emerged incidentally during processing of wheat and rice, and common inputs were used for the dutiable output rather than as inputs for separately intended exempt products. Because the case was unlike one involving two distinct finished products manufactured from common inputs, the demand based on exempt clearances was not sustainable and the Revenue's challenge failed.

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Issues: Whether Rule 6(3)(b) of the Cenvat Credit Rules, 2002 applied so as to require payment of an amount equal to the value of exempted clearances when exempt products arose only as unavoidable by-products in the manufacture of the dutiable final product.

Analysis: The manufacture was of liquid glucose, and gluten and spent carbon arose only as unavoidable by-products in the processing of wheat and rice. The common inputs were used for the manufacture of the principal dutiable product, not for manufacture of the by-products as independent intended products. On these facts, the situation differed from cases where two distinct finished products are manufactured using common inputs and separate accounts are not maintained. The rule requiring payment on exempted goods was therefore not attracted.

Conclusion: Rule 6(3)(b) did not apply to the by-products in these facts, and the demand was not sustainable.

Final Conclusion: The Revenue's challenge failed, and the order dropping the demand was upheld.

Ratio Decidendi: Where exempt goods emerge only as unavoidable by-products in the manufacture of the intended dutiable product, Rule 6(3)(b) of the Cenvat Credit Rules, 2002 is not attracted merely because common inputs were used in the process.

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